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It was a miracle year for the US economy. Inflation has fallen sharply without triggering a recession. Many experts said this would not be possible without mass layoffs and a downturn. The economy has added 2.4 million jobs so far this year and growth has accelerated, with the annual rate topping 5 percent in the third quarter. The good news has also led to a rally in the stock market. In polls, people are negative about this economy, but their actions don't match their words. This year there was a consumption boom. Americans continued to spend heavily on clothing, concerts and vacations. In many ways, this is the year the economy finally returned to something approaching normality. But after a few traumatic years, many people seem to have forgotten what normality looks like.
It seems inevitable that growth will slow from here. Many American consumers have been spending more than they earn lately, thanks to the extra savings people have accumulated during the Covid-19 pandemic (and an alarming increase in credit card balances). At some point, consumers have to back down. Americans have also been buoyed by unprecedented growth in their wealth in recent years, largely driven by rising real estate and stock market prices. It wasn't just about the rich getting richer. The net worth of Americans of all income levels, ages and races increased from 2019 to 2022, according to Federal Reserve data. Still, there are signs that consumers are becoming more selective. As retailer Nordstrom warned in its most recent earnings release, “We continue to see a cautious consumer.” It's still possible that the United States sees a “soft landing” that avoids a painful recession, but growth is likely to be weak in 2024 will be canceled as consumption cools down.
The labor market is the most important indicator to monitor. In recent years it has been easy to find a job. This also helped to boost consumption. But hiring is slowing. Companies are becoming more selective. Employees are no longer quitting en masse and are staying unemployed longer – a sign that it is becoming increasingly difficult to find a new job after being laid off. The current unemployment rate of 3.9 percent is very low, but even a small increase in that rate could unsettle Americans.
Federal Reserve officials are almost certainly done raising interest rates. They must recognize that the labor market is back in balance. Job vacancies still seem to be high, but companies are very selective. The hiring rate has fallen sharply this year. Meanwhile, inflation is approaching the Fed's 2 percent target. Data released Thursday showed the Fed's preferred measure of inflation fell to an annual rate of 2.5 percent over the past six months. The rise in inflation in recent years has been far more attributable to supply problems than many realized or admitted. It appears that this increase was temporary. It simply took longer than many expected to clean up the chaos in the supply chain and hire enough workers again. With gasoline prices falling again and the rise in rental and food prices slowing, the Fed is expected to hit its inflation target in 2024.
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The debate now is when the Fed will start cutting interest rates. Stocks have rallied in recent weeks as investors bet there will be a cut by May. That would certainly help the real estate market, which is frozen and mortgage rates are at their highest levels in about two decades. The Fed will have to wait and see what the data turns out to be this winter, but it would make sense to raise rates back to lower levels after many of the pandemic problems have passed. This does not mean a return to near zero. But as New York Fed President John Williams said Thursday, interest rates are “the most restrictive in 25 years.” The Fed can't prematurely declare the battle against inflation won, but current interest rates could soon appear excessive.
As for President Biden and Congress, they can help by finally agreeing on a budget for this fiscal year and, better yet, establishing a bipartisan debt commission to begin addressing the country's urgent long-term fiscal challenges.
So who deserves the credit for the economic miracle? It is clear that the Fed has restored confidence in its judgment and in return inflation would decline. Biden's $1.9 trillion stimulus package also helped boost people's savings. This still results in higher than expected consumption. Mr. Biden's help also led to numerous new hires in state and local governments this year.
But the biggest factor is the return to normality – companies are unraveling their supply chains even as people return to stores. The United States has a chance to sustain its soft landing. It would be even better — for the country's economy and politics — if Americans believed it could happen.
The view of the post | About the editorial team
The editorials reflect the views of the Post as an institution, determined through discussions among editorial board members in the Opinions section and independently of the newsroom.
Editorial Board Members: Opinions Editor David Shipley, Deputy Opinions Editor Charles Lane and Deputy Opinions Editor Stephen Stromberg, as well as writers Mary Duenwald, Christine Emba, Shadi Hamid, David E. Hoffman, James Hohmann, Heather Long, Mili Mitra, Eduardo Porter, Keith B. Richburg and Molly Roberts.
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